Next big trade: moving from the strong dollar develeraging trade to the dollar debasement trade

We’ve seen the severe damage done to commodities and emerging market equities due to intensifying deleveraging in a deflationary world. This could continue for a while but as we start to look for the next big opportunity to make money, we have to ask this question: when and how a dollar debasement trade could happen?

For the weaker the stock market is, the more intense becomes the monetary and fiscal policy response and the sooner foreign creditors take fright about the US dollar. Conversely, a relief rally now delays the ever more aggressive policy response until later.

If “decoupling” ever doesn’t exist before the crisis, this is actually the moment BRICs, led by China, will start to find ways to decouple from the US by reducing dependence on exports to US consumers. The recently announced Rmb 4t stimulous plan, and the following plan to raise income tax levy threshold, are signs of China moving to more domestic consumption-led growth rather than exports-driven growth. When the move from the strong dollar trade to the dollar debaseent trade comes, Asia will move from being a region of preceived cyclical vulnerability to being the safe heaven; be it Asian currencies or Asian assets, whether equities or real estates. For Asia is where the savings are.

This is the kick-start to the Asian century. As deflation scares force government all around the world to create inflation, which they will always succeed by printing paper money, Asian savers will slowly and gradually move out of anti-growth investments such as depsoits and bonds, to pro-growth assets as negative real rates hold. Commodities are going to shine in this kind of environment.

In one-year, check back and you will find Asia equities and commodities are a lot higher.